EXPERT COLUMN: Straight to the Source

From competitive pressures imposed by supercenters to consumers’ penny-pinching purchases of generic brands and the trickle-down impact on margins caused by fluctuating fuel costs and weather conditions, navigating the grocery business is not for the weak. Now, with the economic recovery taking hold on Main Street -- if consumer behavior is any indication -- grocers are finding revitalized competition from restaurants.

There are strategies, though, that can turn the tables. Since 2010, several grocery outlets, including Wegmans Food Markets, have found new opportunities to generate sales with prepared meals. Striking the perfect balance between convenience and the ability to enjoy a meal in the comfort of their own home, these offerings continue to be a compelling competitive alternative for consumers.

Offering new product lines that meet shoppers’ preferences and needs is always a winning approach, albeit one that’s not without risk. It’s also a major time and resource investment. The key lies in understanding what consumers most desire and then sourcing those products carefully. Partnering with the right supplier for new offerings is critical, as is the ongoing management of the relationship to ensure that the investment is returning as expected.

For many grocers, one alternative to bringing something new in-store can be found by reviewing existing sourcing strategies. Examining costs and finding new places to streamline expenses can improve margins and profit without a lot of effort.

Two areas that can deliver immediate impact are revisiting relationships with strategic suppliers and applying sourcing strategies to categories outside of the usual suppliers:

• The power of competition: Most grocery chains have a core group of suppliers for products on the shelves, including general merchandise, produce and grocery. All too often, as long as products are delivered on time and there are no quality issues, these relationships continue without examination. Unfortunately, this “if it isn’t broke, don’t fix it” mentality leaves opportunities to renegotiate terms and costs on the table. Savvy grocers are taking a more bottom-line-centric approach through e-sourcing, generally putting contracts for direct items out to bid every other year, and indirect goods and services out to bid every year.  Introducing competition means that the suppliers have to win the business each and every time, ensuring cost-effectiveness and higher levels of service. When suppliers — even longtime ones — know that competition is being introduced, grocers can be much more confident that the price they’re getting is indeed, the best one.

• Savings found in unusual places: Looking at categories “outside the box” is a second line of defense in the cost battle. Services that support the business, such as cleaning services, landscaping and maintenance, office equipment, and other, more indirect expenses, are often ripe for cost reduction. One 2012 study found that grocers and retailers using e-sourcing for facilities maintenance service contracts saved more than 20 percent each time the contracts went out to bid.

Collaborating with suppliers can also result in lower costs. Understanding the suppliers’ business, and the pressures they face, may expose innovative ways to structure terms and contracts that benefit both parties. For example:

• Formula-based pricing, which can reduce risk, is one effective strategy for working with suppliers in volatile commodity markets.
• Long-term contracts that promise a certain volume of business over a longer time horizon give suppliers the ability to leverage purchasing power with their suppliers, and then pass the savings along to the grocer.

Growing the bottom line can be challenging in an industry characterized by slim margins, thought to be at the mercy of Mother Nature and fraught with competition from many sectors. Savvy grocers, though, are evolving their sourcing operations -- focusing on discovering and offering innovative products, and achieving sustainable cost savings that impact profit margins.

Steve Whiteman is the chairman and CEO of Phoenix-based Intesource, an e-sourcing company that helps grocers and retailers save money, build value and increase sourcing efficiency.